With companies like LL Bean getting rid of their unlimited returns policies, and fraudulent product returns costing retailers billions of dollars a year, today we look a real-world research study that shows how organizations can turn returns into a profitable and positive experience instead of just an upsetting drag on revenues. Tema Frank interviews Dr. Necati Ertekin, Assistant Professor at Santa Clara University’s Leavey School of Business. There are important lessons for retailers in his recent paper, Immediate & Long Term Benefits of In Store Return Experience.
Dr. Ertekin notes that because we see returns as an unpleasant cost of doing business many retailers have their most inexperienced staff handling them. That’s a big mistake!
In most cases, the best a customer can hope for from such staff is that they’ll take your return without arguing with you. In a worst-case scenario, they’ll try to pressure you into replacing the return with something that doesn’t meet your needs any better.
Not surprising, says Dr. Ertekin, when you think about the incentives at play here. Most retail staff are paid on commission. If you return a product, they lose their commission. If they persuade you to exchange it, they can keep their earnings.
But for the retailer, that’s not the best option.
Pressuring a Customer is Bad
What the study showed was that if salespeople pressure a customer into exchanging a product instead of returning it, the customer is unlikely to come back and buy from you again. It leaves them feeling bad about your company.
Listening to a Customer is Good
But a skillful salesperson recognizes that when you are returning a product there’s a chance for them to better understand your needs. What was it about the first product that didn’t work for you?
If customers feel that the salesperson actually has their best interests at heart, there’s a good chance they will exchange the product, and often even upgrade to a more expensive one.
Competent Salespeople Turn Returns into Future Sales Too
In this study, they not only looked at the short term, they also looked to see what happened with customer loyalty afterwards.
Turns out that if the customer felt genuinely listened to and helped by the salesperson, whether or not they exchanged the return at the time, they were more likely to come back and buy from the retailer again. So there’s a long-term benefit as well as a short term one.
Retailers Must Change Their Training & Compensation Structures
As long as sales staff have only short term commission-based incentives that reward them for converting returns into exchanges, they’ll keep on pressuring customers.
And those customers will feel unhappy with the experience, so they won’t come back. The retailer suffers in the long-term.
So to change the situation two things are needed:
- Sales staff need better training. They need to become more skilled at empathizing and uncovering the true customer needs. That, combined with good product knowledge, will help them find a product that really is better for the customer, and leave the customer feeling happy instead of pressured.
- Compensation can’t be just on short-term sales figures. Customer satisfaction has to be brought into the formula when calculating sales staff pay. Because ultimately, satisfied customers are more profitable for the company, even if it has to take the short-term hit of a product return.
TEMA: When I started podcasting way back in 2012, I don’t think there were any other customer experience focused podcasts. Now they’re sprouting up like weeds. No, that sounds too negative. I think it’s actually great that more and more people are talking about customer experience, so let’s say they’re sprouting up like spring crocuses in the Netherlands. Did you know they actually have a Crocus Vacation Week there? It’s actually quite beautiful.
0:00:54 So, with all these customer experience podcasts around now, I’ve been thinking about what added value I can give you in the Frank Reactions Podcast. I’m looking at two options. I suspect I’ll probably do a little bit of both. I’ve always had one foot in the business world but another in the academic world. I don’t know why, but for some reason, for articles to get accepted into academic journals, they basically intentionally make them difficult for a layperson to read and understand. But, sometimes there’s really great stuff hidden in there, which hasn’t made its way over to the practical business world. I would like to translate some of that research in an interesting and helpful way for you.
0:01:39 Today’s podcast is an example of that. With companies like LL Bean getting rid of their unlimited returns policies and fraudulent returns costing retailers billions of dollars a year, today we look at a very large, real-world research study that shows how organizations can turn returns into a profitable and positive experience instead of just an upsetting drag on revenues. My guest today is Dr. Necati Ertekin, who is an assistant professor at Santa Clara University’s Leavey School of Business. There are some really important lessons for retailers in his recent paper, which is called Immediate and Long-Term Benefits of In-Store Return. You will hear all about those shortly.
0:02:26 The other approach that I’ve thought about in terms of the podcast is to give it more of a focus on customer experience turnaround stories. See, it drives me crazy that the great customer experience examples we keep hearing about like Disney, Nordstrom, and the Ritz Carlton Hotels, they all started with customer service as a core principle. But, the fact is, most companies didn’t start that way, and most of them are really struggling to get better at customer experience.
0:02:57 With all the customer experience consultants out there trying to help, why is it so hard to find real success stories, companies that had bad customer experience and have actually managed to turn that ship around? I’m digging for those stories for my next book. So, if you know of any, please let me know. I’ll be profiling as many of them as I can on this show as I do my research. We need to figure out what really works and what are the things that sound great in theory, but just don’t pan out in practice.
0:03:31 Before we get to today’s episode, I just wanted to let you know about the upcoming Pod Summit, which is western Canada’s podcast conference. It’s taking place this year on May 5th at the CKUA Studios in Edmonton. The Alberta Podcast Network is delighted to be a sponsor of this year’s Pod Summit.
If you have a podcast, you’re going to learn, at that event, how to make it sound absolutely amazing, how to grow your audience, and how to create a show that your listeners will love. If you don’t yet have a podcast, you’ll learn how to start one, and you’ll be welcomed with open arms into the podcaster community. We’re a friendly bunch of people. Tickets are just $150 for a full day of learning and networking, and they are in limited supply, so I’d really urge you to hurry up and get yours. The summit, again, is on May 5th, and you can get your tickets at PodSummit.com.
0:04:29 Now, let’s get on to my interview with Dr. Ertekin and find out how your organization can benefit from people returning stuff they’ve bought.
[Interview starts at 0:04:44]
NECATI: I am Dr. Necati Ertekin. I am an assistant professor at Santa Clara University in Silicon Valley here in Santa Clara, California.
TEMA: Necati, you have been doing a lot of research in the area of customer service and the returns experience. What got you interested in researching customer service in the first place?
NECATI: This interest came from the difference in cultures. Originally, I’m from Turkey. I spent quite a lot of time in Turkey, and we don’t have this business model or to be frank, we didn’t have, until recently–
NECATI: –this business model. When you purchase something in Turkey, it’s difficult to return. After I came to the States back in 2006, it was quite interesting to see that, as a customer, you have that luxury.
NECATI: I call it a luxury because still most of the world does not offer this option to their customers. It got my attention. Then, after I started my Ph.D. in business, I thought this could be a really interesting topic to study given my background.
TEMA: It’s interesting. It just reminded me when I was growing up here in Canada. You couldn’t normally do returns at small stores. It was only at the big department stores. And, of course, we see now the department stores are really suffering, and I wonder if that’s part of it. We used to go to department stores to buy stuff because we’d have the option of returns if we made a mistake.
TEMA: Anyway, so you have an article that you wrote, The Immediate and Long-Term Benefits of In-Store Return, so you note in there that returns typically are about 8% of sales, and that number seems to be increasing, particularly with a lot of online purchases. Yet, you know, a lot of companies see that as a big negative. But, you’re saying that returns can actually be a good thing for a company, so how is that?
NECATI: Right, so the general, the common wisdom is that returns are bad. They are costly because no one wants to get whatever they sold, right? From the first point, you think that it is a cost of business and you want to assign your least qualified people to handle those type of customer interactions.
NECATI: Of course, all these come from lack of main motivation, which is the core missions or the margin that you lose on the return products.
NECATI: This is from the company perspective. When you think about the employee perspective, the problem is even more drastic because those employees, they work mainly in the retail industry. They work for a commission.
NECATI: Whenever they get a return, they lose their commission, so it’s a direct negative effect on their income.
NECATI: Companies can have tolerance, so they can understand how this interaction providing ease for customers can be translated into more sales in the future. But, for employees, it might be quite difficult to understand it. To be frank, I think, without help, they may not even see it, given the level of employees working at retailers. These things are hard to digest.
0:08:22 My approach was, okay, so let’s assume that returns are going to happen, so you cannot give up on returns.
NECATI: There are a lot of evidence in the literature that when you restrict your return policies, you also lose sales. Returns are kind of considered a part of the service offering by customers. They basically make the purchase decision also based on the availability of returns. If there is no return option, they can immediately switch to another retailer that can provide that option.
From that perspective, retailers will have to help with these return products. But, at the same time, as we know from customer management, customer relationship management, retailers also value every single touchpoint with customers … (indiscernible, 0:09:24). From that perspective, even though the outcome is a negative outcome, when customers come to your store, it is an opportunity for retailers, so that’s another interaction point.
0:09:40 When you look at the whole process very close, you are going to see that there are a lot of things going on. First of all, customers are not happy with their purchase for any reason, and they are there to return their products and get their money back. On the employee side, they are not happy because they are about to lose their commission. And, if they can convert that return into an exchange, at least they can save their commission. Maybe not all, but maybe partially.
0:10:20 And, the third part is the company itself, so the company facilitates all these interactions, right? Even though they are not directly involved in this specific experience, they provide the domain for the employee and the customers to have this conversation. For the company, there are a lot of things going on. They want to make their employees happy. They want to make their customers happy. They also want to make money at the end of the day, right?
NECATI: So, this is a profitable company. So, when you think about these dynamics, it’s really an interesting touchpoint. So, given these motivations, a typical employee approach to a return handling process is to force customers to apply some pressure to convert those returns into an exchange. Yes, I understand that you don’t like this product, but how about the other products? So, what was wrong with this product? Oh, I see your point. Here is another product that I think can be better for you.
0:11:27 They have this natural motivation to force customers to exchange their returns. So, that’s their motivation. And, for the customer, returning is actually really specific, person specific. Some people, they are quite comfortable. They don’t mind, and they can return anything they purchase. But, for other people, they just hesitate to have that interaction with anyone when they return because they feel like they are guilty, right?
TEMA: Have you ever–? I don’t know if you’ve looked at this at all. In the literature, is there a gender difference there? I know in a lot of cases of people I know, including my own marriage, I’m pretty comfortable doing returns. My husband avoids it like the plague.
NECATI: That’s an excellent question. There is no study, but I can see that.
NECATI: In the retail data, we see that female customers return more than male customers. When you look at the return rate, it’s higher for females than for males.
NECATI: That, I think, pretty much supports what you observed.
NECATI: Given these dynamics, the entire process becomes quite interesting. Our approach was to identify the potential outcomes from this entire experience. One outcome is the customer can return the product and they will be done, they will get their money back, and they will leave. Another outcome is the salesperson will convince the customer exchange the return. In this case, an exchange will occur. The salesperson will save the commission. The customer will end up with another product and, at the same time, the company will be better off compared to the pure return. These are all outcomes at that point.
0:13:19 Our approach from a customer relationship management perspective was that since this is another customer interaction point, any time you interact with customers, there are also long-term consequences. You can expect a response in the future in the form of repurchasing, in the form of word of mouth. Those are, from the retailer’s perspective, more tangible outcomes that can be related to this specific return interaction.
NECATI: My motivation was to look at these two potential outcomes. One is the immediate outcome that comes naturally because of the dynamics given, and the second outcome is more like a natural outcome of any customer interaction. We obtain data related to return experiences. So, I had contacted this jewelry company during my Ph.D. program, and I spent quite a lot of time in the company’s headquarters office to observe their operations. To be frank, I was even on the field for about three weeks to visit three different stores.
0:14:34 I have seen how things can vary from one salesperson to another salesperson or from one store to another store when it comes to handling returns. And then, finally, we obtained some relevant data set. The data sets include customer satisfaction survey responses. Whenever a customer returns a product at this company, they are given a receipt indicating that they had either an exchange or a pure return.
NECATI: At the end of the receipt, there is a link to an online survey. Not every customer completes the survey, but there are plenty of customers. When you think of big companies, big retailers of this size, even a small response rate corresponds to a lot of data points.
TEMA: What about the SKU? I mean, presumably, people who respond feel more strongly, either positively or negatively.
NECATI: Exactly, so there’s an issue that you need to address when you do data analysis. You are absolutely right because customers can respond either when they are extremely happy or when they are extremely angry. Either way, when you do the analysis, you need to consider that option, and you need to address it accordingly.
NECATI: This is exactly what I did in the article. We obtained this customer satisfaction survey. In the survey, there are a bunch of questions, but there are certain questions that can be related to the interaction that I was trying to explain. One question is related to the pressure the customer felt during the return experience, so this pressure is directly related to the motivation to obtain an immediate benefit, right?
NECATI: If I put the pressure on a customer, hopefully, I can convert that return into an exchange and I can save my commission.
TEMA: Of course, the sales, retail sales staff tend to be fairly short-term, so they would naturally have a short-term orientation.
NECATI: Exactly. Another question was related to the salesperson competence. At the end of the day, if you’re familiar with consumer returns, the idea of returns is like you buy the product with an uncertainty. You don’t know what you are buying by 100%.
NECATI: Then you are going to try the product. Assuming that you are a rational, reasonable customer, if you like the product, you are going to keep it. If you don’t like the product at the end of the trial period, you are going to return it, right? From that perspective, the return policy is kind of an insurance for customers. When you consider this perspective, any customer who believes that the product is not a good fit for them is going to return.
NECATI: Right? From that perspective, during the return period, during the return experience, salespeople have additional information that they didn’t have during the purchase, right? During the purchase, you help the customer. You provide a lot of options.
NECATI: That’s all what you can do. But, during the return–
TEMA: You know what the actual experience was.
NECATI: Exactly. You know there is something you suggested didn’t work out. Right? There’s additional information. How can you extract this information? How can you use this information?
0:17:56 “Oh, I see now that you didn’t like this product. Tell me more about the features that you didn’t like.” If you can truly understand why your suggestion in the first place failed, you can actually make empathy for the customer, and you can see if you can make a better suggestion because the customer’s need didn’t disappear. They’re still in need for the purchase. If you believe once you identified the true reason of the return, once you identify why the product failed in the first place, if you can provide a better suggestion given this information, given this additional information, actually, you can send the customer with a product that hopefully works this time and the customer is going to be happy at the end of the day with the right product. Of course, as a salesperson, you will be happy because you save your commission and the retailer is happy with the outcome.
NECATI: But, to obtain this information, to utilize this information, it requires a lot of skills. It’s not straightforward. First of all, you need to have strong communication skills. You need to understand the true reason of the customer. You need to show the customer that you actually care about the customer, so it’s not about the specific purchase.
NECATI: Once you convey that feeling to the customer, then a second piece comes. Okay, once I know that the reason of the return, what do I know about my products? What is a better product that I can suggest? That requires a second set of skills, which is product knowledge.
NECATI: You need to be competent in your job to identify the reason of the return and to provide a better replacement.
TEMA: That means that companies should be investing in training their salespeople, perhaps better than they are.
NECATI: Exactly. These are all, of course, customer satisfaction surveys. We measured everything from the customer perspective. When you jump into perceptions, those things can be quite different from actual intentions.
0:20:19 My approach was, we know what the customers think about the experience, specifically. But, instead of using pure survey data, we need to look at the transactional data because that’s the actual outcome. What I did is, I combined these two different datasets.
0:20:37 That’s another interesting point, by the way. Most of the retailers, major retailers, they keep all these data sets in different departments for different purposes. For instance, for this company, survey data was kept by a department versus the transaction data was kept by another department.
NECATI: These two departments do not communicate to each other. The beauty of this analysis comes when you combine things.
TEMA: Well, and I wonder, too. In a lot of companies, I suspect they don’t even analyze the returns’ impact very much. That’s maybe a strictly accounting kind of transaction.
NECATI: Exactly. Exactly, that is true. Again, they think that this is a cost center.
NECATI: They think it will reflect returns in their accounting, but there is no proactive action that they take. I can tell you that the industry is getting better.
0:21:34 When we combined those two data sets — by the way, here is another note. In this company, all the survey data, there are roughly, I think, 48 different questions.
TEMA: Forty-eight questions on a survey?!
NECATI: Yes. Yes.
TEMA: That’s crazy! That’s nuts! Who is going to fill out a 48-question survey?
NECATI: Customers fill it out because they have the incentive to fill out the survey, so they can get some percent, some discount on their next purchase if they fill it out.
TEMA: Forty-eight questions! What percentage of them fill the whole thing?
NECATI: It is quite small, less than 5%.
TEMA: Yeah. Okay.
NECATI: They have millions of customers. Still, it gives you a pretty high sample size.
NECATI: When we combine things, we look at the two outcomes. First, in the transaction data, we can identify whether customers have converted their returning to an exchange, which I call the immediate benefit of a return experience. Second, we can also look whether or not that customer showed up in the future to make another purchase, which is kind of the repurchase or, I call, the long-term benefit of the return experience.
NECATI: Then, we have the survey data. We can measure how customers perceive salesperson competence, as well as how they perceive the pressure they felt during the experience. We can identify the driving factors of the exchange outcome. We can also tie this exchange behavior. We can differentiate customers with respect to their repurchase behavior between customers who exchange their products during the return and customers who do not exchange their products during the return.
NECATI: What I find is the salesperson pressure, whenever they apply pressure, is it perceived negatively. That’s expected. But, it also increases the chance of exchange.
TEMA: Right, so customers won’t be happy, but they’ll accept it.
NECATI: Exactly. The salesperson competence when customers perceive that the salesperson is trying to help them, and they know what they are selling, things are quite different. In that case, competence can increase the exchange rate as well as the satisfaction and, hopefully, the overall repurchase behavior.
0:24:02 I measure two tangible outcomes, those that exchange and repurchase outcomes. We also can measure the satisfaction, customer satisfaction level. The two predictors are competence and pressure.
NECATI: As that pressure increases, the customers are dissatisfied. That’s expected. When competence increases, customers feel more satisfied with their return experience.
NECATI: Together, when satisfaction is — of course, their future purchase is going to increase as well, so they will be more likely to show up in the future.
NECATI: An interesting point in this study is that when the exchange happens, it doesn’t necessarily mean that customers are satisfied, and they will show up in the future again.
TEMA: Right, it may just be they were heavily pressured.
NECATI: Right. From the literature, we know that when customers make a purchase, this is an indication for future purchases. Customers who complete a transaction will be more likely to visit your store in the future than customers who do not complete the transaction.
NECATI: That’s from the purchase standpoint. But, from the return standpoint, what I find is it’s not that straightforward. When customers exchange their return, that’s kind of completing another purchase transaction, right? You purchase something, yes. You will be more likely to return in the future if you also leave the store happy, satisfied.
TEMA: Right, so that would come to the salesperson competence then.
TEMA: If they really got better at understanding what you needed, you’re more likely to exchange, and you’re more likely to be happy with the result and, therefore, more likely to buy from them again.
NECATI: Exactly. When you force the customer to exchange their return, they will be dissatisfied. But, what will happen in the future, you’re going to lose the business with that customer. I tried to quantify the gain through the exchange and the loss through losing the future business. I tried to compare those two things, and what I find is even though you can convince a customer to exchange today, if you lose that customer in the future, that is going to have more impact on the business. For the retailer, it’s a pure loss, but it’s also important to communicate this information to salespeople because salespeople should be also long-term perspective oriented.
TEMA: How do you deal with that? Is the answer to not pay on commission or what? As we noted earlier, a lot of sales staff don’t stick around in one company for all that long, so they’re likely not to get the benefit of that repeat purchase. How can companies deal with that problem?
NECATI: A perfect question. To answer this question, let me tell you what the current practice is. The current practice is this retailer, as well as other retailers, they train their salespeople. Even though they know that some of them may quit their job, but still training has been shown to improve sales in general. Training is going to be there regardless. When I look at the training module at this company, the specific point I realize is that they train their salespeople to do things to exchange the return during the return process. Exchange is the ultimate goal for a salesperson during a return experience.
TEMA: Perhaps they should be rewarded on customer satisfaction rates rather than on exchange rates?
NECATI: Exactly. As long as the customer is also happy with the exchange.
NECATI: We need to, first of all, train salespeople to convey this information. In particular, we need to state that the first practice would be customer satisfaction during the return experience, not the exchange. Saying this is not enough. You need to incentivize salespeople to deliver this relationship during the return experience.
0:28:20 One way to do this is to change the incentive mechanism. Instead of providing commissions based on purely sales to our salespeople, I think a big impact will come when you also incorporate the satisfaction level. This is a great example for many major retailers. They can measure customer satisfaction. They have transaction data, and they also have information for a salesperson.
0:28:48 Basically, I can see the salesperson who processed the transaction, I can see the outcome satisfaction level by looking at the survey data, and I can combine all those three information. Using all these three different data sets, I can measure the level of satisfaction provided by a specific salesperson.
TEMA: Right. It’s interesting because I think of companies like electronic stores. I started buying my electronics at Staples because they weren’t on commission, whereas a lot of the other electronic stores, you’d walk in. The sales staff didn’t know much about the products, but they were just pushing to sell, sell, sell.
TEMA: That was such a turnoff.
TEMA: Whereas, I’d go into a Staples store. They might or might not know more about the products than the guys in the other stores, but at least they weren’t. I really felt that they were trying to help me instead of just trying to sell.
TEMA: Even in the first place, quite apart from returns, that makes so much more sense.
NECATI: Perfect. Now we talk about different types of customers. For you, it is more important to be treated well than purchasing a product with a cheaper price, right?
NECATI: On the other hand, there are a bunch of other customers who could be price sensitive, so they don’t think about the quality of the experience, but they’re after a low price, let’s say.
NECATI: Regardless, for you, providing a good service is going to work immediately, even during the purchase, during the initial purchase. For price-sensitive customers, even if it doesn’t work during the purchase, providing a good service will be a reward in the future, so even by price-sensitive customers.
NECATI: There are techniques, like the technology is getting better, and there are certain algorithms. You can use transaction data even across companies. There are some, I think, companies offering this service. They can obtain the data from multiple companies. Using, let’s say, credit card information, they can track a customer through purchases across different stores, different….
TEMA: It’s like a credit rating, only it’s–
NECATI: Exactly. It’s like a credit rating. When a customer tries to return, and if that customer is a bad customer, I think Nordstrom or Neiman Marcus, I’m not sure, but one of those two companies, even Best Buy can be another company, so they put this in their policy, and they say that now — they didn’t have this before — now they say, now the company has the option to deny a return based on the case. They will evaluate each return case-by-case, and they can deny it.
TEMA: So, you need really well-trained people to handle those.
NECATI: Exactly, but those customers get the service from the third party. Let’s say I am a bad customer. I am trying to return my product. When I provide my information, using the service, Best Buy will be able to identify that I am a bad customer, and they can deny my return.
TEMA: Huh. That is very interesting. I think that’s probably a good place for us to end off here. Thank you very much.
TEMA: We often forget how good we’ve got it here in Canada and in the United States where almost every store will accept returns, and often for cash, not just for store credit. But, as Dr. Ertekin’s research has shown, it’s important that returns be handled gracefully. Nobody wants to be pressured when they’re trying to return something.
0:32:44 But, as Dr. Ertekin pointed out, the need that drove you to buy the product in the first place is probably still there. A good salesperson who actually listens to your reasons for why the product didn’t work for you can easily help you exchange and often even upgrade it for something that’s a better fit. The exciting news in this research is that the retailer will not only benefit in the short-run, but you’ll also be more likely to come back and shop there again.
As is so often the case, it comes down to investing a little more in training and really thinking through what kind of incentives do we have in place. What are we rewarding staff for? If you’re rewarding them for the wrong things, you’re going to get the wrong behaviors.